Tiered Rates Are
Fair Rates

June 15th, 2010
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The Outpost

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Much has been said and written lately about the new tiered electric rates for residential customers of Xcel Energy. Some of it has been accurate, but a lot of it has been misleading. The Colorado Public Utilities Commission understands that consumers are concerned about the impact of the new rate structure on their utility bills. As with any electric rate structure, some customers will benefit more than others based on their patterns of usage.

By Ron Binz

But the PUC believes that tiered rates, sometimes called inverted block rates, are an inherently fairer way to charge for electricity usage during the summer while helping to encourage energy efficiency.

First of all, consumers need to realize that, with or without tiered rates, their overall electric bills will be higher than they were last summer. Xcel Energy sought and received two rate increases in the past year that increased residential bills by about 12-15 percent. The rate increases were necessary to pay for additional generation, transmission and distribution expenses to meet our state`s increased electricity demand.

It is precisely this cycle — higher peak demand leading to the need for additional power generation — which tiered rates are designed to break. Xcel Energy must produce or buy enough electricity to meet its peak load, when demand for power is at its highest. In Colorado, this occurs during the summer. This is also when electricity is the most expensive to produce, because all of the plants that Xcel owns or buys power from are operating at or near maximum capacity.

For example, Xcel Energy recently built two additional natural gas turbines generators at its Fort St. Vrain station. The units, which cost approximately $174 million, were approved to serve peak loads, and may operate less than 40 hours per year. By shaving the peak load, which tiered rates are designed to do, we can delay or avoid the need to build additional, expensive “peaking plants” like these.

For years, Colorado`s peak electricity demand has been rising, driven in large part by the growth in air conditioning, large-screen televisions, computers, and other electronics equipment. This increase in demand has required Xcel Energy to invest more than $2 billion in new generation, transmission and distribution to serve that load. Previously, those costs have been spread equally among all ratepayers, resulting, in essence, in those who use less electricity subsidizing those who are driving the peak higher by using more.

Tiered rates are designed to flip that around, so that those who use more, pay more. It is simply a fairness issue. The PUC recognizes that tiered rates are not a perfect solution, and that there will always be individual situations where tiered rates don`t work as well as they should. But we believe it is a step in the right direction, reflecting the PUC`s efforts to price energy in ways that more accurately reflects its true cost.

With the implementation of tiered rates, it is more important than ever for consumers to pay attention to how they use electricity. During the months of June through September, consumers who use more energy will pay more, and consumers who use less will realize greater rewards for their efforts to use electricity wisely. And by slowing the growth in peak load, all electric consumers will benefit.

Ron Binz is the Public Utilities Commission Chairman.



Filed Under: ARCHIVES • Editor Outpost

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There Are 5 Responses So Far. »

  1. Comment by Mark on 15 June 2010:

    This is rationalizing, self-justifying garbage. If I were you right now, I would not be doing anything to tie my name to the travesty you just oversaw.

    You and your pals have completely sold out to Xcel and to environmental Luddites that would prefer we use no electricity at all.

    If you had the guts to do your job properly, you would have:

    1 - Based pricing on the change in usage from previous years not on gross usage. This pricing structure is nothing but poorly camouflaged income redistribution, which I did not realize was part of your charter. I have a hard time believing that, on a collective basis, smaller power users are less expensive than large power users. I strongly suspect the opposite is true.

    2 - Waited for the adoption of variable rate pricing and smart meters. In that way, at least the consumer that you purportedly protect, has some way to intelligently respond to the economic malpractice you are wreaking upon them.

    I look forward to seeing Xcel’s third quarter earnings report. I’m sure it will be a doozy. Nice work!

  2. Comment by Russ on 24 June 2010:

    One flaw in Mr. Binz’ statement is that he uses increases in peak demand to justify a pricing policy designed to discourage use and reduce total consumption. His argument falls flat because peak system demand and total residential consumption are not strongly related. This is just a money grab.

    This pricing structure will be a burden on future sales of plug-in electric vehicles. They’re coming soon in large numbers, and in a cage match betwen Xcel and the auto industry, my money is on the auto industry. The day will come when smart meters and variable rates will be necessary and, most likley, mandated.

    The low consumer subsidizing the higher consumer argument is just laughable. As any residential meter turns faster, the profit margin on that meter goes up. If that increased cash flow isn’t enough to fund system improvements to meet demand then Xcel isn’t running its business very well. The real issue is that increased residential consumption makes it more difficult for Xcel to meet contractual reliability for industrial customers, and they are punishing us for it. (Think about airlines overselling flights.)

    So, we are being fleeced by this rate increase. I hope Xcel uses this windfall to fund a smart meter installation program. That way they could at least give the appearance of caring about their residential customers.

  3. Comment by Matt on 30 June 2010:

    Ok - So I am confused….

    ‘Tiered rates are designed to flip that around, so that those who use more, pay more. It is simply a fairness issue.’

    But the base Tier 1 is 48% higher that June and the Tier 2 rate is 194% higher that the June rate. I would guess that everyone is paying more. Correct?

  4. Comment by Jonathan C Smith on 30 June 2010:

    Attn; Excel Energy:

    Your increase, while perhaps necessary for growth, is an obvious political statement by the Monopoly of Excel Energy. I have a middle class family, work hard and most of my friends in business all over Colorado will be impacted by this increase. The rate is 3x what is was for over 500kwh; that is unacceptable. This is class warfare on individual rights. Excel can not just charge us more than a different group based on a political opinion of saving energy. This is really about trying to make us use less energy and stomping on individual rights. It is not legal to do this. We all need to pay our fair share of this public resource. If I use more, I already pay more and that is my choice. Do your job Excel and provide what you are in business to do. If you can’t give enough power then there needs to be competition or you need to fire your executives that make poor planning decisions.

    I have always paid for wind power. That is my choice; not your choice to make me pay for your new plants or green technologies. How dare you tell me that I have to pay more because I need more to live? Well if everyone cuts off the wind power part of the bill for those that do pay, it will penalize these socialistic thieves. I can’t wait to sue these criminals this summer over illegal practices.

    It’s not our problem that your company has planned poorly and now needs an increase. Even if we accept the errors of your management in poor planning for the future needs of Coloradans, don’t you dare put it on the backs of hard working people just because we use/need more energy. It is only fair to raise rates evenly on everyone. Stop hiding behind saving energy and penalizing us for not doing as we are told when you know the real reason is political environmental gain.

  5. Comment by Victoria Cornell on 8 July 2010:

    This rate hike is against the basic premise of conservation, if you conserve and use less you pay less and not that rates are set so most households can’t meet it and are charged more. Simply said, I think an investigation of business practices is in order and I intend to ask for it through state and federal elected officials. I’d like to see the data and projections you used to set that 500kwh rate.

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